The global economic rebound is moving much more quickly for emerging markets than developed countries, underscoring a diverging set of challenges for policy makers.
The booming rebound in emerging markets such as China is fuelling fears of inflation and asset bubbles, leading officials to tighten credit availability amid expectations interest rates may soon rise.
"Key emerging economies in Asia are leading the global recovery," but they also are "grappling with the challenges posed by surging capital inflows," an International Monetary Fund report released yesterday states.
In advanced economies such as the U.S., Britain and Japan, meanwhile, the rebound is slow and continues to rely heavily on ultralow borrowing costs and government stimulus spending. Finance officials are reluctant to pull back on those measures any time soon, over fear the fragile rebound could falter.
Growth in emerging and developing economies this year will be about three times the pace of expansion in developed nations - 6 per cent compared with 2 per cent - the IMF forecast states.
"In most advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies activity is expected to be relatively vigorous, largely driven by buoyant internal demand," the IMF says in an update to its World Economic Outlook.
Overall, though, the IMF sees the rebound gathering steam. It expects the global economy to advance 3.9 per cent this year, better than its previous forecast of 3.1 per cent.
It warns against "a premature and incoherent" exit from government spending and low interest rates in the developed world. Still, though some countries and regions will require an extra boost for longer than others, the Group of 20 is expected to craft a largely co-ordinated exit strategy.
The unbalanced global growth has a positive side: Faster growth in China and other big emerging markets takes pressure of the U.S. to be the main driver of global growth.
But the report suggests IMF officials are worried about the pace at which this change is taking place, said John Curtis, a distinguished fellow at the Waterloo, Ont.-based Centre for International Governance Innovation.
The rush of investment in those economies risks stoking inflation, which could destabilize the global rebound. Rapid growth will also continue to boost commodity prices, creating a risk that countries such as Canada become too dependant on resources, Mr. Curtis said.
Complicating matters is the growing unease among politicians in much of the rich world about the massive debt being incurred to finance the rebound.
On top of expected growth of 3.9 per cent this year, the global economy is set to expand 4.3 per cent in 2011 after contracting 0.8 per cent in 2009, the IMF said. In October, the Washington-based lender had predicted growth of 4.2 per cent in 2011.
Inflation should be tame enough to allow central banks to keep borrowing costs low in economies that need it, the IMF said, and the rebound in developed nations will be hampered by government debt loads and high unemployment.
Developments around the world this week illustrate the disparities the IMF identifies.
Japan's credit rating outlook was lowered by Standard & Poor's, which cited the country's ongoing battles with deflation and record deficits. Britain's economy finally crawled out of recession late last year, but just barely, expanding a less-than-anticipated 0.1 per cent. In the U.S., home prices and consumer confidence are on the mend, but home values have recovered only about a tenth of the more than 30 per cent-reduction over the past few years, and joblessness is hovering around 10 per cent.
At the opposite extreme, the IMF projects China's economy will grow a whopping 10 per cent this year after almost 9 per cent last year, and India's will grow nearly 8 per cent. Indications that China is taking steps to limit bank lending to cool the world's fastest-growing economy have roiled markets in recent days.
Sheryl King, chief strategist at Merrill Lynch Canada Ltd. in Toronto, said emerging markets - and some advanced nations, like Canada, France and Germany - are reaping benefits from having banking systems that weren't mired in toxic assets, which the IMF, in a separate report, said continue to make the global financial system "fragile."
"We have an uneven expansion that seems to be divided between haves and have-nots in terms of who's got a good banking system," Ms. King said. "Because emerging markets didn't have particularly sophisticated banking industries to begin with, there was less trouble for them to get into."
With files from Kevin Carmichael